Meaning of Money• Money (money supply)—a generally accepted

means of payment for goods, services or debts Money is a stock

…the stock of dollars in our wallets

…the stock of credits in our bank accounts

• Wealth—the total of assets that store value Money is one component of our wealth

• Income—the flow of earnings per unit time We earn income .. we don’t “make money” (unless

we’re counterfeiters)

Functions of Money … the usual suspects• Medium of Exchange — promotes economic

efficiency by minimizing the time spent buying things Must be easily standardized

… widely accepted… divisible… easy to carry… durable

• Unit of Account — measures value Prices set / records kept / contracts made in money terms

• Store of Value —stores purchasing power Most liquid of all assets Yields no or minimal interest Keeps its nominal value: $1 is a $1 Loses value during inflation

Evolution of the Payments System

• Commodity Money

• Fiat Money

• Checks

• Electronic Payment

• E-MoneyMeasures of Money Stock• Revisions are issued because:

Small depository institutions report infrequently

• Be concerned only with longer-run movements of money supply measures

Growth Rates of the M1 and M2 Aggregates, 1960–2008

Sources: Federal Reserve Bulletin, p. A4, Table 1.10, various issues; Citibase databank; www.federalreserve.gov/releases/h6/hist/h6hist1.txt.

Growth Rate of M2: Initial and Revised Series, 2008 (percent, compounded annual rate)

2.2 If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling anvil seller, should I take a loan from Larry the Loan Shark at a 90% interest rate if no one else will give me a loan?

2.7 How can the adverse selection problem explain why you are morelikely to make a loan to family member than to a stranger?

3.8 Rank the following assets from most liquid to least liquid:a)Checking account deposits; b) Houses; c) Currency; d) Washing machines; e) Savings deposits; f) Commons stock.

3.10 In Brazil, a country that underwent a rapid inflation before 1994,many transactions were conducted in dollars rather than reals. Why?

3.14 For each of the following, indicate the monetary aggregate (M1, M2) that includes them: Currency; b) Money market mutual funds; c) Small-denomination CDs; d) Checkable deposits.